modern corporate ratio by lyon rich

7/29/2019 Modern Corporate Ratio by Lyon Rich

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THE LIBRARYOFTHE UNIVERSITYOF CALIFORNIAHENRY RAND HATFIELDMEMORIAL COLLECTION

PRESENTED BYFRIENDS IN THE ACCOUNTING

PROFESSION


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MODEKNCORPORATION ACCOUNTING

(VOUCHER SYSTEM)

INCLUDING INSTRUCTION IN CORPORATEORGANIZATION, METHODS OF TRANSACT-ING BUSINESS, AND BOOKKEEPING

PUBLISHED BYJ. A. LYONS & COMPANY

CHICAGO NEW YORK


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Copyrighted 1908BYPOWERS & LYONS


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HF5C81,C7L?PREFACE

Unquestionably a textbook on corporation accounting should emphasize those account-ing features which belong distinctively to corporations. The preparation of this workhas been inspired largely by the belief of the authors that existing textbooks on this sub-ject do not emphasize these distinctive features sufficiently to really teach the thing forwhich their title stands.

Corporation accounting does not necessarily differ from the accounting of a pro-prietary business in its methods of keeping those records which express the relation ofthe business to others and exhibit the trading operations of the business. The distinctivefeature of corporation accounting is its method of keeping those records which set forththe relation of the corporation to its investors. The number of individuals interestedin a corporation is as a rule larger than the number interested in a partnership. Therelation of the stockholder to the corporation is widely different from that of a partnerto his firm. The records which have to do with the investments of stockholders con-stitute a distinct and separate phase of corporation accounting for which no necessityexists in a proprietary business. The plan of distribution of corporate profits is also adistinctive feature of corporation accounting which requires special emphasis in a workon this subject.The importance of placing emphasis on these distinctive features of corporationaccounting is further emphasized by the fact that the conditions under which corpora-tions may be organized and the plans for profit distribution are susceptible of many vari-ations, thus giving rise to the necessity for instruction which will cover not one but manycases. "Modern Corporation Accounting" places the emphasis where it belongs. Further,it does not content itself with one opening entry and one plan of profit distribution, butfully illustrates opening and closing entries as under various conditions. This is donethrough separate exercises. Preceding the principal exercise, or "set," are seven exer-cises in opening corporation books. Following it are five closing exercises, illustratingfive different methods of closing, and making use of data taken from five different linesof business. Incidentally the student is familiarized with the accounts used and thesystem of cost analysis used in six businesses instead of one.The provisions of law governing the organization and internal administration ofprivate corporations vary widely in the different states, so much so that up to this timeno textbook on the subject of corporation accounting has been published which has beenfully available for use in schools in different states. Existing textbooks on this subject,whatever may be said in regard to their adaptability for use in the state where written,inflict positive injury upon students when taught in other stateswith the exception,of course, of textbooks which side-step the difficulty by not attempting to give instruc-tion in matters of organization and administration"Modern Corporation Accounting" may be safely taught in any state. In orderto present the matter of corporate organization clearly and definitely, the instructionin the process of organization has been made to conform to the laws of one state. When-ever this instruction is in conflict with the laws of other states, the student's attention

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is called to the fact and he is referred to tabulated information which sets forth theimportant points in which the incorporation laws of the different states vary. Thetransactions used in this work have been so prepared that they are not inconsistent withthe laws of any state.

It is important that teachers understand the dangers surrounding the giving of instruc-tion in corporation bookkeeping, and that they earnestly supplement the work of theauthors at every point, impressing upon students the importance of a knowledge of thelaws governing corporations, the danger of acting without legal advice in certain matters,and the necessity for care in following the laws of the state under which the corporationexists. A copy of the state statutes governing incorporation can probably be ^securedfree of charge from the Secretary of State in any state. Every teacher of bookkeepingis advised to secure this

The voucher system is used. While the use of vouchers is by no means limited tocorporations, yet this system is especially adapted to the uses of corporations and maybe considered a typical feature of corporation accounting. The voucher system wouldnot be readily adaptable to a business in which settlement was made on the monthlystatement instead of on the invoice. Its advantages are particularly marked in a busi-ness wherein the preservation of a receipt for every disbursement is regarded as essential.

Special attention is given in this work to the subject of cost analysis. Cost analysisis not a feature peculiar to corporation accounting. Its presence here is justified bythe fact that the principal business illustrated is a manufacturing business, and by thefurther fact that the student needs it. The subject is an extensive one and cannot betaught in schools in its entirety, but no student should consider as completed a trainingin accounting which has not included some instruction in the fundamental principlesof the science of costs. His knowledge of this science will materially affect his right tobe considered an "accountant" instead of a mere "bookkeeper."The authors of "Modern Corporation Accounting" bring this work to the attentionof commercial teachers for their use in advanced classes, not claiming to have produceda work above criticism, but confident in the belief that it will be found to be a strongand well-balanced text; that it will be found to teach thoroughly what its title indicates,placing the emphasis where it belongs; and that it may be safely and consistently taughtin any school in any state.

J. A. Lyons & Co.


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MODERN CORPORATION ACCOUNTINGVOUCHER SYSTEM

IntroductionThe purpose of this work is to show students what a corporation is, and how it is

created; to give them in concise form a correct idea of those accounts which belong pecu-liarly to corporation bookkeeping, and the original entries which affect those accounts;and to illustrate several processes of closing the ledger of a corporation and distributingcorporation profits. While studying these things, observing students will learn muchthat will be of general benefit and that will serve to guide them in possible future deal-ings with corporations.

DESCRIPTIONDefinition

A corporation is an organization formed under authority of the state and endowedwith the power of succession and the privilege of transacting business as a single individual."An organization." The corporation is not an individual or group of individuals, but is a beinghaving an identity separate from that of its members. One doing business with a corporation must relynot upon the standing or character of its members (stockholders), but upon his knowledge of the financialcondition of the corporation, and upon such safeguards as the law has established in regard to the trans-action of the business of corporations."Under authority of the state." This regulation of the organization and powers of corporations bystate statute will be treated later more specifically."Power of succession." The death or withdrawal of one or all of its members has no effect whateverupon the life of a corporation. Such an occurrence would merely result in a transfer in the ownership ofthe stock affected. The active management not being vested in the shareholders, changes in the personnelof shareholders do not affect the conduct of the corporation's business."As a single individual." This relates to business and legal acts only. The corporation acts throughits agents (officers and employes) acting under authority of the directors.Classification

There are three kinds of corporations: (a) Public or Municipal Corporations; (b)Quasi-Public Corporations; (c) Private Corporations.

(a) Public Corporations are those which are created entirely for the benefit of thecommunity at large, and in which every citizen is assumed to be interested. Their pur-pose is governmental. Cities, towns, villages, drainage districts, etc., are public corpora-tions. Not being organized for profit, they issue no stock. They exercise jurisdictionover given territiories through ordinances of their own making.

(b) Quasi-Public Corporations (quasi = in a manner). These are organizations withmore or less public functions, but not so fully endowed as are public corporations. Theymay sue and be sued as corporations, and they may hold property for certain purposes,but they do not pass ordinances, neither do they have a seal. Of this sort are schooldistricts, counties, townships, boards of commissioners of highways, etc.

(c) Private Corporations. A corporation which is organized by private enterprise5


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6 BOOKKEEPINGfor the financial profit of its members is a private corporation, even though the objects forwhich it exists may be more or less of a public nature. A railroad company or a gas com-pany is a private corporation. It is a private corporation if it issues stock. It is privatecorporations which are to be especially treated of in this section.

A private corporation, the business of which is of the nature of a public utility, and which operatesunder a franchise granted by the public, may be controlled by the public in those matters affecting thepublic's interests. This has reference to such enterprises as railway, telegraph, telephone, gas, or watercompanies. Such corporations are sometimes classed as quasi-public.A franchise is the right granted to a company by local, state, or national authority to use the publicstreets or highways for the purposes of conducting its business.

AdvantagesThe advantages of conducting a business under corporate management instead of

individual or copartnership management may be enumerated as follows:1. Stockholders are not liable individually for the debts of the business, if their stock is paid up.*2. The corporation is not dissolved by the death, or other disability, of one or all of the stockholders.3. New capital may be secured by the selling (with the sanction of the state) of new stock (usually

preferred stock), thus avoiding the admission of special partners.4. The interest of one stockholder may be transferred either in whole or in part to some one else

without in any way affecting the organization.5. Money can be borrowed more easily by a corporation than by a proprietary business of equal

standing. This is accomplished by the sale of bonds. The advantages of borrowing under the bondissue plan will be explained later.

6. Exclusive right to the use of a certain name in a given state can be secured.

THE PROCESS OF INCORPORATION(ILLINOIS) tCreationA corporation may be created only under the authority and by the power of the

state. Formerly, each corporation was created by a special enactment of the legislature.This, it was soon discovered, was a prolific source of legislative corruption and favorit-ism, and general statutes were provided in many states under the provisions of whichcorporations could be formed by any persons who would comply with them in every detail.As corporations increased in popularity, more and more of the states enacted these gen-eral provisions, until now any other manner of incorporation is forbidden by constitu-tional provision in all but seven states.

The provisions of these general statutes in the .different states vary widely. When,therefore, it is sought to organize a corporation in a given state a copy of the corporationstatutes of that state should be procured and its provisions followed closely.

The Illinois state laws relating to the incorporation of companies distinguish between private cor-porations created for purposes of profit and private corporations not created for purposes of profit, andmake special provisions for each class. Special provisions are also made for cemetery associations, co-operative associations, educational institutions, elevated railroads, foreign corporations, free public libraries,gas companies, Grand Army of the Republic, title guaranty companies, juvenile reformatories, pawners 'societies, railroads and street railroads; and for the punishment of persons forming combinations in restraintof trade.

Varies in different states. See page 76. Look up this and similar references at the time your atten-tion is first called to them, as your attention will be called to them but once.tin order to present, in a concrete form, some one definite process of incorporation, we have givenon page 7 the exact steps in this process for corporations formed in Illinois. For an outline of the

necessary steps in various states, see page 73.


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BOOKKEEPING /Persons desiring to form a corporation in Illinois must file with the secretary of state an affidavit

that they are not connected with any trust or combine the purpose of which is to restrain competition ortrade, to limit production or to fix prices. Corporations are required to make affidavit to this effect an-nually.

ApplicationWhenever any number of persons (not less than three or more than seven)* wish

to form a corporation, they must file with^the Secretary of State a statement duly acknowl-edged before a notary public or other officer qualified to take acknowledgments, whichstatement shall set forth the proposed name, location, object, amount of capital stockand number of shares, the duration of the corporation and such other facts as may berequired by the laws of the state.The License to Solicit Subscription

If the application is approved, the Secretary of State will issue to the applicants alicense as commissioners to solicit subscriptions.Meeting of Subscribers

After the capital stock shall have been fully* subscribed the commissioners mustconvene a meeting of the stockholders for the purpose of electing directors. Thedirectors then appoint the officers of the corporation.The Certificate of Incorporation

The law of the state requires at least one-half* of the subscription to be paid in.It may be paid in in cash, in property or in nominal assets such as good will, franchise,etc.* When the amount called for has been paid in to the commissioners, they must maketo the Secretary of State a full report of all proceedings, accompanied by proofs that theprovisions of the state statutes have been complied with in every respect.

This report must state what amount of the capital stock has been paid in in property otherthan cash; the board of commissioners appraises the value of such property. It will be seen from thisthat the state exercises no discretion in the matter of the values of such property items, this being leftto the commissioners. Subscribers paying in cash in order to protect themselves, should, therefore, makeit a point to find out how the other subscriptions are being paid. Subsequent purchasers should observethe same precaution. Stockholders have a legal right to these facts, and persons intending to becomestockholders should insist upon ascertaining the facts before investing.

These "proofs" consist of affidavits made in due form before a notary public and attested by him.The various "provisions" above referred to relate to such matters as the adoption of rules for theregulation of the corporation; presenting a list of the names of incorporators, directors and officers; a plan

for the signing and acknowledgment of the application; advertisement of the application; proportion ofcapital stock which shall be subscribed for (100%); rules governing the amount of indebtedness whichthe corporation is authorized to incur; method of filing the completed certificate, etc. There are somany of these special regulations that complete enumeration of them cannot be attempted in a workof this kind. It is sufficient to call attention to their existence and to advise that no one shouldattempt to form a corporation without a very careful study of the corporation law of the state.

When the corporation has complied with the provisions of the statutes in every re-spect, the Secretary of State will forward a Certificate of Incorporation.* This is a formaldocument under the Seal of the State, granting the corporation the power to conductbusiness as specified in its application, subject, of course, to the general incorporationlaw of the state. Before the corporation may commence business, this certificate must

*Varies in different states. See page 76.


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bookkeepingCertificate of Incorporation


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BOOKKEEPING 9be filed with the Recorder of Deeds of the county in which the principal business ofthe company is to be conducted.

The certificate of incorporation is variously designated in the different states as, "Articles of Incor-poration," "Certificate of Organization," and "Certificate of Incorporation." In many states, formalcertificates are not issued.

When corporations are formed under special statutory enactment, the formal docu-ment granted by the state is called a Charter.The term "charter" has two meanings, one special, the other general. When a corporation is formed

by a special statutory enactment of the legislature the formal document prescribing the rights and powersof such corporation is termed a "charter." When a corporation is formed under the general corporationlaw of the state, the term "charter" means the contract relation between the state and the corporation.In this case it is not a formal document. The certificate of incorporation is often called "the charter,"although, strictly speaking, it merely evidences the existence of a charter, or charter relations.

Before any general incorporation laws were enacted formal charters were issued to all corporations,and existing corporations which were formed in those days still hold their powers under the charters thengranted them.

Certificate of Stock and StubThe Acme Mahufictoring Co.

Fastedto Stock Ltiiger Fol. -

Received thu Certificate.

Siftiaturt ofH M Milltr.

$9&tt$d&$&tt&&$9&&&9$&ft&&tt&tt&9&4flMOr'4flM0r'$tt&$&$$4r:::::::::C-.:


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10 BOOKKEEPINGresembling a partnership interest, while the physical evidence of its existence is the stockcertificate. Stock certificates are personalty, not realty; yet strictly speaking they arenot personal property, but are of the nature of choses in action.Kinds of Stock

(a) Common Stock is the ordinary stock of the company. If a company issues but onekind of stock, it is Common Stock.

*(b) Preferred Stock is stock that has a preference as to dividends or as to assets orboth. "Preferred as to dividends" means that if there are not enough dividends to satisfythe holders of both the preferred and common stock, the holders of the preferred stockmust be satisfied first; what is left of the dividends will be given to the holders of commonstock; this is what is usually meant by "Preferred Stock." "Preferred as to assets,"means that in case the corporation fails, or for any other reason is dissolved, and it becomesnecessary to divide the assets, the holders of preferred stock will be satisfied before anyof the assets are given for the satisfaction of the holders of common stock.

There are two good reasons which justify the issue of preferred stock. First: Common stockholderswishing to avoid a special assessment to cover a loss or deficit, are willing to issue preferred stock. Theeffect of the issue is that the common stockholders sacrifice their future profits to the preferred stock-holders by unanimous vote, choosing this step rather than an immediate cash loss through assessment.Second: The holder of common stock and the holder of preferred stock both understand perfectly wellwhat they are buying, and the distinction between preferred or common stock is borne in mind when theprice of either is determined upon. Investors would not buy the preferred stock, except on the under-standing that their dividends would be assured them whether the common stockholders received anythingor not.

Participating Preferred Stock is that which is not only preferred as to the rate ofdividend to which its holders are entitled, but also participates, or shares, in any profitsremaining after the common stockholders have received a specified rate of dividend.

Non-participating Preferred Stock is that which is not in any case entitled to any greaterrate than the rate for which it is preferred. In a very prosperous business common stockwill sometimes receive a higher dividend than non-participating preferred stock, becausethe non-participating preferred stock is entitled to dividends up to only a certain per cent,and the common stock is entitled to all the rest, which may, in such a business, be morethan that which was apportioned to the non-participating preferred stock.

Cumulative Preferred Stock is preferred stock which is sold under an agreement thatany dividends which the corporation is unable to pay its holders up to the per cent forwhich it is preferred will be made up if possible from future distributions of dividends;and that holders of common stock are not entitled to any dividends until all arrears onthe cumulative preferred stock are fully paid.

There may be several grades of preferred stock as follows: First preferred; Secondpreferred; etc.

Guaranteed Dividends are sometimes offered on stock in one corporation which isowned and backed by a larger corporation amply able to make the guaranty.

Treasury Stock is that stock which is held by the company for future sales. *In statesrequiring that all of the capital stock be subscribed for before the existence of thecorporation begins, treasury stock can exist only when the corporation has bought backor otherwise acquired some of its own stock. (One method of raising funds is for stock-holders to donate a part of their stock, by the sale of which additional money is secured.)

*See page 76-


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BOOKKEEPING 1 1Dividends on treasury stock are usually returned to the loss and gain account of the cor-poration. Treasury stock cannot be voted, since it represents the interests of no individualstockholder.

Watered Stock is that which is issued within the charter limitations, but which is notsupported by the actual value of the assets of the corporation.Spurious or Overissued Stock is such as is issued in excess of the amount named in thecharter. It is absolutely void.

Stock ValuesThe amount named in the stock certificate is known as the nominal, par or face value-

It is fixed and unchangeable. The market value is what the stock sells for in the market.This is determined largely by its earning power or dividends. The real, intrinsic or liquida-tion value is what the stock would be worth on final dissolution when all assets are con-verted into cash and all debts paid. The book value of stock is its value as ascertainedfrom the records of assets and liabilities as shown by the books. Often this is greaterthan the intrinsic value, as it is not always possible to sell assets at the prices at whichthey are entered in the books.

The intrinsic value of one share is found by dividing the total intrinsic value of the corporation'sstock by the number of shares. The book value of one share is found by dividing the total book valueof all the shares by the number of shares.

Many factors enter into the determination of the selling price of stock. Primarily, of course, theintrinsic value must be considered. Next in importance comes earning power, or dividends. In addi-tion to these there are many conditions that affect its stability, such as the reputation of its officials forhonesty, public confidence in the conservatism and wisdom of its management, and the future prospectsof the corporation's success. Finally, there must be considered the influences that affect the fluctuationsof the market from day to day. Heavy buying on the part of influential houses will cause prices to rise.Heavy selling by those supposed to "know" will cause prices to go down. (Fictitious buying and sellingare sometimes resorted to by stock market manipulators.) Rumors that some captain of industry is in-terested in a certain stock will inflate its price. The death of one prominent in the financial world willtemporarily depress prices. Rumors of consolidation will often improve stocks. Rumors of war, orfinancial panic, will hurt them. And so on.Stock Transfers

Stock may be transferred from one owner to another by sale. The certificates ofthe stock sold must be endorsed by the seller over to the buyer. The voting power of thestock is transferred with the ownership. It is not necessary that the consent of other stock-holders be secured, and the transfer does not in any way affect the conduct of the corpora-tion's business.

It is often customary for companies to take up old certificates and issue new onesin their place, when stock is transferred. When this is done, a proper record of thetransfer of ownership should be made on the books of the corporation.A subscriber for stock who has not yet fully paid for it may transfer his ownershipof the stock by selling it. But he cannot transfer his obligation to pay for the balancefor which he has subscribed. The state granted the charter on condition that he wouldpay the amount for which he subscribed and creditors have extended credit to the cor-poration upon the assumption that he would do so. He will be held for the full paymentof his subscription.


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12 BOOKKEEPINGDividends

A private corporation, like any other private business, exists for the purpose of earn-ing profits for the investors. A part of the profits is periodically distributed to the stock-holders. The amounts so distributed are called dividends. Dividends of a certain rateper cent on the capital stock are declared by vote of the directors. They are appropriatedfrom the earnings of the company. Should the directors declare a dividend in excessof the earnings the excess would have to be paid out of the capital of the company andthe directors would be held personally responsible by law to the corporate creditors forthe amount of the excess. It is not lawful to impair the amount of the capital of a cor-poration for the payment of dividends.

Should a corporation be unable to pay as large a dividend as might be wished, the directors mightbe tempted to declare a large dividend anyway, paying it out of the capital. This is against the law. Sucha course would deceive investors and would cause a diminution of capital which would be unfair to creditors,for whose protection the law has declared that the capital shall not be used except for purposes of carry-ing on the business.Assessments

When the books of a corporation show a deficit because of continued losses, it is some-times decided by unanimous vote of the stockholders that the deficit shall be metby the assessment of the stockholders rather than that the assets of the corporation beallowed to diminish.

ManagementThe management of a corporation is vested in a board of directors* These directors

are elected by vote of the stockholders. The stockholders, as individuals, have no powerwhatever in the management of the corporation or in the transaction of its business. Thedirectors, as might be inferred from their title, direct the affairs of the corporation, butthey do not transact the business of the corporation. The actual business is transactedby officers appointed by the directors (President, Vice-President, Secretary, Treasurer,etc.), and by persons they may employ.

The fact that you are a holder of stock of the Chicago & Alton R. R. does not authorize you to transactany business for that railroad. You have voting power in proportion to the amount of stock you own,and can vote for the directors and on certain questions of policy, but that is as far as your powers extend.The fact that you are a director of the Chicago & Alton R. R. does not imply that you have anyauthority to sell tickets to passengers. Your authority as director is limited to the right to vote on ques-tions of management and policy.The authorized agents and employes of the corporation transact its business. They may be removedat the instance of the directors, but the directors are not authorized to transact the business which theemployes are employed to perform. Again, the stockholders may by vote remove the directors, but thestockholders are not authorized to perform the work of the directors.

VotingShareholders vote upon who shall be the directors of the corporation; whether new

stock or bonds shall be issued and sold; and on matters relating to the existence ofthe corporation, to the widening of its scope of operations, to the increase of its assets, orto its dissolution. A shareholder may cast as many votes as the number of shares whichhe holds. When a person or group of persons own more than one-half of the voting power

For No. of directors see page 77.


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BOOKKEEPING 13of the corporation, they are said to own a "controlling interest" in the corporation, sincethey can, by their votes, control its acts and policies.

Cumulative Voting is the plan of voting which enables the holder of stock to protect his own interestsby casting all of his votes for one director. It enables the minority stockholders to elect one directorwho will safeguard their interests. Illustration: A is the holder of 40 shares of stock in a corporationwhich is voting upon the election of three directors. B and C, the other members of the corporation,together own 60 shares. Under the ordinary plan of voting, B and C could elect the entire directorate.Under the cumulative plan of voting, A may cast his 40 votes three times for one director, instead of oncefor each of three directors. This gives him a total voting power of 120 votes with which he can elect onedirector. B and C, who own 60 shares, have a total voting power of 180 votes with which they can electtwo of the directors. If A had been compelled to cast his votes separately for three directors, casting only40 votes for each director, B and C would thereupon have cast 60 votes for each director; and thus B and Cwould have elected the entire directorate.

The directors vote as individuals, each director being entitled to one vote. ThePresident and other officers, as such, have no voting power. It frequently happens,however, that the officers are also directors; they then have the right to vote as directors.Powers of Stockholders

Individually, stockholders are entitled to vote at their meetings, to share in the cor-poration profits, and to share in the corporate assets in case of dissolution. They mayexamine the books of the company at any reasonable time. They may pledge their stockas security for their personal debts, and still retain the right to vote the stock, and toshare in its dividends.

In Illinois, stockholders have the right to vote by the cumulative plan.* They may cast their votesby proxy if they wish.*

Collectively, the stockholders elect the directorate and vote upon matters of corporatepolicy as enumerated in the paragraph on Voting.

In Illinois, a majority of the stockholders may remove directors for cause, or may change thenumber of directors. Two-thirds of the stockholders may call a meeting at any time. They maydissolve the corporation.

Liability of StockholdersAs has been previously stated, stockholders in a corporation are not liable personally

for the debts of the corporation. Should the corporation fail, they may lose the amountthey have invested, but in most states they are not liable further. Some states, however,have enacted provisions making members of a corporation liable to creditors to an amountin addition to their investment, which amount varies in the different states* Under theNational Banking Act, a stockholder in a National Bank is held liable to creditors to anadditional amount equal to the par value of his capital stock.A stockholder is always liable to creditors for the amount of his unpaid subscription.Agreements among stockholders that the entire amount of subscriptions need not be paid in,are binding among themselves, but are of no effect as against creditors when the workingcapital of the corporation is exhausted and creditors demand payment. Stock not fullypaid up may be transferred to another, but the obligation of the original subscriber topay his balance is not canceled thereby Even the dissolution of the corporation will notrelieve the subscriber from liability to creditors on his unpaid subscription.

*See page 76.


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14 BOOKKEEPINGDuties of Directors

They appoint the officers and agents of the company and have authority in mattersrelating to the management. In many states they make the by-laws; i. e., rules forinternal government of the company. Important contracts, such as the borrowing ofmoney, should be authorized by the directors. The directors act as a body; a director hasno individual authority.

In Illinois the directors may levy assessments for installments on stock. They may hold meetingsoutside of the state provided the action of such meeting be ratified by a later meeting held within thestate.

Powers of the CorporationCorporate powers are of two kinds: (1) Powers incidental to corporate existence,

arising from the very nature of a corporation. (2) Charter powers.(1) Incidental powers may be briefly outlined thus:The endowed power of succession.The right to maintain and defend suits at law.The right to hold property, except that a corporation may not hold real estate not necessary to its

existence and the transaction of its business.*The right to the exclusive use of a certain name in a given state.The right to have a common seal.The right to make by-laws, i. e., rules for internal management.The right to remove officers and even members, for just cause.(2) Charter powers.Since the charter includes the powers applied for and the whole law of the state,

charter powers are: (a) Those powers which are specifically enumerated in the Com-pany's application, (b) Those specifically granted by the statute.A person may, as a general rule, do anything not specifically forbidden by law. Acorporation may do only what is granted by law. Powers need not, however, be expresslygranted; they may be implied. Illustration: The power to issue negotiable paper orbonds, and the power to pledge corporation property, are implied when the statute ex-pressly grants the power to borrow money, because money cannot be borrowed unlessone of these things be done.The power to transact the business specified in the application for the charterusually carries with it the following implied corporate powers:

To borrow money.To issue commercial paper or bonds.To become surety or guarantor in the usual course of business, but not to issue accommodation paper,or to assume other obligations not arising from the transaction of its business.To loan money.To acquire and enforce a lien upon its own stock*or stock of other corporations when such stock isheld by a debtor, but not (generally) to take stock in other corporations as an investment.* To hold itsown stock as treasury stock (except when this privilege is expressly denied by statute).

Following is a list of important powers often granted by state statute:To accept property, services or intangible assets in lieu of cash in payment for stock.*To collect from subscribers in installments.To declare stock forfeited for non-payment of installments and to sell such stock in satisfaction of

the company's claim.*See page 76.


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BOOKKEEPING 15To classify directors as to time of expiration of office.*To consolidate with other corporations, if not competitive.*To extend its corporate existence.To change its corporate name.To increase or decrease its capital stock.To dissolve without recourse to the courts.To retain a part of its original capital stock as treasury stock.To purchase its own capital stock.*To purchase stock in other corporations and hold the same as an investment.To issue preferred stock.In studying the foregoing enumerated powers, two things must be borne clearly in

mind:(1) That the exercise of any of the powers above enumerated may be prohibited or

restricted by statute in any State, and that generally (in the case of statutory powers)the failure of the statute to specifically grant the power constitutes a prohibition.

(2) That a corporation may not transact any business except that for which per-mission is given in its charter.

CORPORATION ACCOUNTINGCorporate Records

(a) Stock Records1 Subscription Book.2 Stock Certificate Book stub.3 Stock Ledger.4 Installment Receipt Book stub.5 Installment Ledger

(b) Official Record Minute Book.(c) Operation or Business Records Including books of original and subsequent entry necessary

for recording the transactions of the business.(d) Profit Distribution Records.The members of the corporation sustain a different relation to the corporation itself

than do partners to their business. The distinctive feature of corporation accounting is itsmanner of keeping the records to express this relation. The ordinary business of a cor-poration is recorded in the same way that the business of any partnership or proprietorshipis recorded.

Corporation accounting differs from other accounting in the records for organization,and the plan for the distribution of profits. If a partnership or proprietorship be changedto a corporation it is not necessary to make any change in the books of accounts so far asthey express the relation of the business to its debtors and creditors, but it is only necessaryto make such changes as are necessary to show the interests of those who are associatedtogether in the business, and the plan for distributing the profits.

(a) Stock Records:The stock records of a corporation are those in which account is kept of the stock-

holders' interests, and the transfers thereof as they may occur. These consist of:1. Subscription Book or List, in which are shown the names of subscribers and the

amounts of their subscriptions.2. Stock Certificate Book Stub. As the certificates of stock are issued, records

are made on the stubs from which the certificates are detached. These records areposted to the Stock Ledger.

*See page 76.


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16 BOOKKEEPING3. Stock Ledger, showing each member's holdings of fully paid stock, for which certifi-

cates have been issued.4. Installment Receipt Book stub. As receipts are issued for part payments on

stock, records are made on the stubs. These are posted to the Installment Ledger.5. Installment Ledger, containing each member's account with the corporation for

stock subscribed for by him.(b) Official Records:The official records are kept in the Minute Book. This book should contain an orderly

record of the business transacted at all meetings of directors as well as at all meetings ofstockholders. To keep the Minute Book properly is a work of great importance, andwhat is written in this book should be written by one who is familiar with the laws gov-erning corporations. Minutes of important meetings should be approved by an attorney.

(c) Operating or Business Records:As has been previously stated, these records would not necessarily differ in the booksof a corporation from records of the same kind in any other business. No attention willbe devoted to them at this point.

OPENING ENTRIESThe Capital Stock account in the General Ledger of a corporation corresponds to the

investment account of a proprietary business, since it represents the total of the interestsof all investors. (Bondholders are investors, in a sense, yet the relation of the bondholdersto the corporation is not, strictly speaking, that of investors, but of creditors.) In open-ing a set of corporation books it is .therefore necessary to credit the capital stock accountfor the total amount of stock authorized. The capital stock account is a controllingaccount, the amount shown therein being at all times equal to the aggregate of the stockissued to the various stockholders, plus that reserved as treasury stock in the hands of theTreasurer as trustee.We will consider the opening entries for five different conditions:

Condition 1. Capital stock all paid in in cash, $100,000. This is the simplesttransaction possible.

Cash, $100,000Capital Stock, $100,000.

In the stock ledger open an account with each stockholder and credit him for the parvalue of his stock.

Condition 2. Capital stock, $100,000, all subscribed for but only $50,000 paidin in cash, the balance to be paid on call of the directors. In this case the installmentledger is generally used.

(a) Subscription, $100,000.Capital Stock, $100,000.

Explanatory: Use the facts of the subscription list as an explanation, showing subscribers*names and amounts subscribed for.(b) Debit each subscriber in the Installment Ledger for amount of his subscription. By this method

the Subscription Account opened in the General Ledger is in the nature of a Controlling Account, as theaggregate of the Installment Ledger should always agree with it.

(c) As each subscriber pays, Cash is debited and Subscription credited in the General Ledger. Thesubscribers will be credited individually in the Installment Ledger.


19/88

BOOKKEEPING 17Should the subscriptions not be sufficiently numerous to warrant a separate Install-ment Ledger, the subscription account in the general ledger should be kept in this way:On the debit side enter the names of the subscribers, allotting each one as many lines as

the number of installments he is expected to pay. As the installments are paid in, debitCash and credit Subscription, entering the individual credits in the subscription accountopposite the name of the subscriber making the payment. In this way, the subscriptionaccount will exhibit a general result, and in addition it will be possible to determine fromit the condition of the account of each subscriber.

Condition 3. Capital stock not fully subscribed for and the subscription not fullypaid in in cash. Illustration: In this case let us assume the capital stock to be $100,000.$80,000 is subscribed for. $20,000 is held as treasury stock for future subscription.Of the part subscribed for, $40,000 is paid in in cash and balance subject to call.Two entries are necessary:

(1)


20/88

18 BOOKKEEPINGis organized with a capital stock of $200,000.00. The services of a promoter are engaged,and Fred H. Barnes, E. G. Howard and J. C. Williams, capitalists, are interested in theventure. The stock is issued at a par value of $100.00 per share as follows:

J. R. Conway, 850 shares, paid for in full by his Patent Right, valued at $85,000.00:D. B. Decker, promoter, 100 shares in full

of his services.Fred H. Barnes, 500 shares, to be paid for by real estate valued at $50,000.00, to be deeded to the

company and used as a factory site.E. G. Howard, 400 shares, to be paid for in Sundry Machinery and Tools from his own factory, which

he has decided to abandon. Property value, $17,850.00. The balance he pays in cash.J. C. Williams, 150 shares, paid for in cash less a stock discount of 5%: What entry?

Patent Right $85,000.00Promotion Expense, 10,000 . 00Real Estate, 50,000.00Machinery and Tools, 17,850 .00p . j E. G. Howard, $22,150.00 1U.C.Williams, 14,250.00 J 36,400.00Stock Discount, 750.00

Capital Stock, $200,000 . 00Promotion Expense. It is customary to engage promoters in new ventures, because of their connec-

tion with capitalists who are seeking investments. For his services, the promoter is generally paid in cashor in stock of the new company or both. His services are an expense to the business, and should be chargedto "Promotion Expense." This account stands as an asset, although a very doubtful one. It shouldgradually be written off into Loss & Gain until wiped off the books.

Stock Discount. This is an allowance which is binding between the company and the stockholder,but should a creditor attack the corporation and the firm assets be insufficient to pay its debts, the stock-holder could be compelled to pay the balance due on the par value of his stock. Too much emphasis cannotbe laid upon the necessity for caution in the matter of buying subscription stock that is not fully paidup. The buyer incurs a liability for the payment of the balance. Such stock is not cheap, even ifgiven to the subscriber. In case of the failure of the corporation, it may eventually cost him full parvalue, for he may be held by creditors for the full amount of the unpaid balance.

EXERCISESJournalize

Jan. 1, 19 . The National Adding Machine Co. has incorporated with a capitalstock of $70,000.00, all paid in in cash.

Feb. 1, 19 . J. C. Walker, patentee of a wheel brake for wagons, has organized theWalker Wheel Brake Company, a corporation for manufacturing and selling the device.The total capital stock of the company is $200,000.00, of which Mr. Walker is allowed75 shares of $100.00 each, as fully paid up, for his patent. The rest of the capital stockis paid in in cash.March 1, 19. The $100,000.00 capital stock of the Wheeling Coal Mining Co. isall subscribed for, but only 65% is paid in, the balance being payable upon call of thedirectors. Of the amount paid in, $50,000 was paid in cash by subscribers A, B, C, and D;$10,000.00 was given by the company to E. G. White, owner of the land, for a ten-yearlease on the land; and $5,000.00 was given to H. A. Swigart for promotion services.

Apr. 1, 19. A corporation has been organized under the name "The Burwick SoapCo.," capitalized at $150,000.00. Two-thirds of the capital stock has been subscribedfor. $80,000.00 has been paid in, as follows, the balance being payable on call: Cashfrom stockholders A, B, C, and D, $50,000.00. Real estate, from A. G. Sedgwick,$10,000.00. Mdse and good will, from G. H. Bronson, $8,000.00 and $7,000.00,respectively. Promotion services of Benj. H. Waters, $5,000.00.

*This problem not applicable to an Illinois corporation.


21/88

BOOKKEEPING 19*May 1, 19 . The Metallic Motor Co., Inc., has been organized with a capital stock

of $90,000.00. 80% of this has been subscribed, half paid in, balance payable on call.June 1, 19. A call has been issued by the directors for half of the unpaid balances

on subscriptions to the stock of the Metallic Motor Co., Inc. All of this is paid in in cash,except $5,000.00, which amount was paid in by one of the stockholders in U. S. 2% GoldBonds of 1913.

July 1, 19. A. C. Brink owns a factory site worth $10,000.00. C. E. Gailey ownsa patent right worth $12,000.00. F. W. Schramm owns machinery worth $10,000.00.H. H. Harris agrees to promote the organization of a $100,000.00 corporation for thepurpose of manufacturing Mr. Gailey's patented article, and to devote two years of histime to the purpose in exchange for $10,000.00 stock in the company. Mr. Brink, Mr.Gailey, and Mr. Schramm are to invest the real estate, patent right and machinery abovementioned, receiving stock in equal exchange therefor. The rest of the $100,000.00 israised by subscription, 80% of which is to be in cash, the balance upon call.

Aug. 1, 19. Smith, Cole and Johnson are partners whose respective invest-ments are $10,000.00, $9,000.00, and $6,000.00. They decide to incorporate. Theyestimate the value of the good will of the business at $10,000.00, which is added to theirinvestment in determining the amount of capital stock. Smith, Cole and Johnson dividedthe capital stock in the same proportion as their original investments.

Sept. 1, 19 . During August the books of the new corporation exhibited a profitof $300.00, and Smith, who wishes to unload his stock, finds a buyer whom he convincesthat the company can be relied upon to make a minimum net profit of $3,500.00 per year,or 10% on its capital. The buyer wishes his money to return him 7% per annum, andpurchases Mr. Smith's stock at a price determined by his desire to make 7%, and hisbelief that the company's profit will be $3,500.00 a year. What does the buyer pay Mr.Smith? How much does this exceed Mr. Smith's original investment as shown by thepartnership books before incorporation?

ACCOUNTS SHOWING DISTRIBUTION OP THE PROFITSThe plan of distribution of the profits of a corporation requires the presence in the

ledger of certain accounts not kept in a proprietary business.The Undivided Profits Account

The profits of the business instead of being carried directly to a proprietor's accountor accounts are transferred to an Undivided Profits account. The profits which appearin the undivided profits account are distributed into the various fund and reserve accounts,and the Dividend account. The amount carried to the dividend account depends, ofcourse, on how much is left after the fund and reserve accounts have been cared for.The Dividend Account

When dividends are declared the total amount of the appropriation for this purposeis transferred to the credit of the dividend account by a proper closing entry, or by ajournal entry. This amount remains on the credit side of the dividend account, until paidout in cash to the shareholders. When paid out in cash, the cash account is credited and thedividend account is debited. Sometimes dividends are declared which are not to be paiduntil some future date. In this case, the dividend account exhibits a balance of the

This problem not applicable to an Illinois corporation.


22/88

20 BOOKKEEPINGamount of dividends declared, but not paid. In such a case, dividend warrants mightbe issued to the stockholders who would hold them as evidences of debt until time fortheir redemption.

ISSUING BONDSA corporation in need of money may secure it by issuing bonds. A bond is the cor-

poration's promise to pay. It corresponds to the promissory note of an individual, exceptthat it is more formal, and is under seal. The following comparison of individual andcorporation obligations will shed some light on the nature of a bond:

Individual Obligations. Corporate Obligations.Unsecured Note. -------- Debenture Bond.Principal Note Secured by Mortgage. - - Mortgage Bond.Collateral Note.--------- Collateral Trust Note.

The title of a bond may indicate the purpose for which it has been issued, the man-ner of its redemption, the time of its maturity, the name of the corporation issuing it;or it may indicate any or all of these things. "U. S. 2% Gold Bonds, 1914," is a properdesignation for a bond issued by the government, bearing 2% interest, maturing in 1914,and payable in gold. "Municipal Bonds" are bonds issued by cities and othermunicipal corporations. In one instance bonds issued to raise money for building abridge were named "City Bridge Bonds."

Debenture Bonds are unsecured bonds, and correspond to the unsecured promissorynote of an individual.

Mortgage Bonds are those secured by a mortgage on the corporation's property."First Mortgage Bonds," "Second Mortgage Bonds," "General Mortgage Bonds," etc.,are bonds of this kind.

Money may be more readily secured by the sale of corporation bonds than by thenegotiation of a loan by an individual or firm. It is easier to float a bond issue of $20,000.00divided into separate bonds of $500.00 each, than to find one individual or syndicate whichwill loan $20,000 00 in a lump sum. Bonds and promissory notes are alike in thatboth are usually secured by the property of the borrower.When a corporation issues bonds, a bond account should be opened on the booksunder a title which sufficiently describes it, as "First Mortgage Bonds," "Bonds of 1920,"etc, When the bonds are disposed of for cash, the journal entry is:

Dr. Cash,Cr. The bond account (under proper title).

If the bond be sold at a discount and a commission be paid an agent for selling, theentry is:

Dr. Cash.Dr. Bond Brokerage.Dr. Bond Discount.

Cr. The bond account (under proper title).

The bond account is a liability account the same as the Bills Payable account, sinceboth represent amounts due.


23/88

BOOKKEEPINGCOUPON BOND

21

The coupons, which are shown in the above illustration as attached to the right edge of the bond,may be attached to the bottom of the bond or, when there are many, may constitute a full page whichis attached to the bond. Each coupon is a note for a half year's interest and each bears a differentdate. As each interest payment falls due, a coupon is detached and exchanged for cash. Study theform carefully.


24/88

22 BOOKKEEPINGThe Bond Sinking FundA bond issue constitutes a debt owed by the corporation. The lenders (bondholders),naturally wish to be assured that the debt will be paid at the time agreed upon, i. e., thetime of maturity of the bonds. Therefore, it is usually made one of the provisions of thebond that the corporation binds itself to create a sinking fund and periodically to placetherein amounts which will in time redeem the bonds. A sinking fund usually, therefore,not only provides for the redemption of bonds at maturity, but operates as a guarantyto bondholders that the bonds will be paid.

Sinking Funds may be treated in either of two ways:1. When the corporation has bound itself, as explained above, to set aside a part

of its profits for the purpose of redeeming the bonds, specific assets, usually cash, shouldbe definitely reserved. If the asset so set aside consists of cash, the proper journal entry is:

Dr. Sinking Fund Assets.Cr. Cash.

2. When the sinking fund is created for the purpose of meeting a future obligation,but there exists no agreement to set aside specific assets, the corporation may elect tocreate a merely nominal reserve out of its profits. The proper entry for this would be:

Dr. Undivided Profits.Cr. Sinking Fund Reserve.

This plan would permit the assets to remain in the business as a part of its working capital, insteadof being actually set aside where they could not be touched. The sinking fund reserve so created wouldbe an auxiliary account, subordinate to the Undivided Profits account. It would contain a part of theprofits, which part has been taken out of the Undivided Profits account as a precaution, to prevent itsdistribution as dividends.ILLUSTRATIONS OF JOURNAL ENTRIES

Condition 1. The Western Manufacturing Company is financially embarrassed. Ameeting of stockholders has been held, and it has been decided to issue and market pre-ferred stock to raise funds. The stockholders are agreed, and legal permission havingbeen obtained, 2,000 shares are issued at $100 each, and sold in the open market for cash.

Entry:Dr. Cash.

Cr. Capital Stock Preferred.In case of both common and preferred stocks, separate Capital Stock Accounts should

be kept in the General Ledger, as well as separate stock ledgers. Each stock ledger willprove with its own account.Condition 2. Suppose some of the larger stockholders at the above meeting had

decided to donate 1,000 shares of their stock to the company for future sale, to raisethe much-needed funds. The entries would be:

In Journal:

In Stock Ledger;

Dr. Treasury Stock.Cr. Undivided Profits.

Dr. Donors.Cr. John Smith, Treasurer (as trustee).


25/88

BOOKKEEPING 23Condition 3. Suppose that the company had decided by a unanimous vote to

raise the funds by assessment. The following entry would be made.Dr. Assessment No. 1.

Cr. Undivided Profits (or other suitable account).On the debit side of the assessment account post the names of stockholders and amount due fromeach. When they pay, credit Assessment account opposite proper debit.Condition 4. Suppose that the company had decided to issue First MortgageBonds to raise the money, and sell them to the public.No entry would be made, except as the bonds are sold; then:

Dr. Cash.Cr. First Mortgage Bonds.

Condition 5. If the company had decided to establish a Sinking Fund to meetthese bonds at maturity and to make deposits with trustees at regular intervals for suchpurpose, the following entry would be made as each cash deposit is made with the trustees*.

Dr. Sinking Fund Assets.Cr. Cash.

Condition 6. When the company creates a reserve for the above sinking fund,the following entry is made.

Dr. Undivided Profits.Cr. Reserve for Sinking Fund.

Condition 7. Suppose that 500 donated shares are sold at $90.00 per share:In Journal

Cash $45,000.00.Stock Discount, 5,000.00.

Treasury Stock, $50,000.00.In Stock Ledger

Dr. John Smith, Treasurer.Cr. Purchasers.

Paying Off the BondsCondition 1. The periodical reservations of cash now amount to the total of thebond issue. All the cash so reserved is now used with which to pay the bonds, and the

following entry made:Dr. The bond account (under proper title).

Cr. Sinking Fund Assets.Condition 2. When a nominal reserve which has been created out of the Undi-

vided Profits account has reached an amount equal to the amount of the bond issue, payoff the bonds making the following entry:

Dr. The bond account (under proper title).Cr. Whatever assets are given in payment (usually cash).

As the contingency for which the Sinking Fund Reserve account was created nolonger exists, close this account back into undivided profits by the following entry:

Dr. Sinking Fund Reserve.Cr. Undivided Profits.


26/88

CORPORATION SETA Manufacturing Business

Characteristics:In the following set, emphasis is placed on those transactions and entries which are

peculiar to corporations and corporation accounting. The voucher system is used forthe payment of bills, no accounts payable being kept. Cost of production is shown throughcost accounts which are kept separate from the general expense accounts and which areclosed into the Production account. Profit distribution to the reserve accounts andthe Dividend account, and the use of the Undivided Profits account, are illustrated in asimple manner. BOOKS USED

Subscription Book.Stock Certificate Book, and stub.Stock Ledger. | Described on pages 15 and 16.Installment Receipt Book, and stubInstallment Ledger.Cash Bookdescribed on pages 28 and 29.Sales Bookusual form.Vouchers Payable Registerdescribed on pages 32 and 33.Journalusual form.Petty Cash Bookdescribed on page 36.General Ledgerusual form.Sales LedgerThis book has an extra column on the credit side for discounts, the

net amount received being entered in the general column. Credits are posted to theSales Ledger on the line exactly opposite the corresponding debits. The sales accountsare kept separate from the general accounts for no other reason than that a differentruling is used. Consider the Sales Ledger as a part of the General Ledger in taking trialbalances. ACCOUNTS KEPT

Stock Ledger accounts, one-fourth page each.Installment Ledger accounts, one-fourth page each.Sales Ledger accounts, one-fourth page each.General Ledger accounts as follows:

Capital Stock 8 lines Manufacturing Labor 21 linesSubscription 12 lines Manufacturing Expense 21 linesNotes Receivable 10 lines Materials 21 linesFactory & Site 12 lines Materials Expense 18 linesTools & Machinery 12 lines In-Freight 12 linesNotes Payable 10 lines Cash Discount Cr 12 linesVouchers Payable 12 lines * Sales 21 linesSouthern Pine Lumber Co 8 lines Out-Freight 21 linesWeyerhauser & Co 8 lines Cash Discount Dr 16 linesLoss & Gain 16 lines Reserve for Depreciation 8 linesAdvertising 18 lines Reserve for Surplus 8 linesInterest & Discount 21 lines Dividend No. 1 : 8 linesGeneral Expense 1 page Dividend No. 2 8 linesImplements 21 lines Undivided Profits 8 linesProduction 21 lines

24


27/88

BOOKKEEPINGCLASSIFICATION OP LOSS OR GAIN ACCOUNTS

25

In-Prt.

Cash Dis.Cr.

Out-Prt.

Cash Dis.Dr.

Sales Bk.Total

M'fg.Labor

Mfg. Exp.

PMaterialsMaterialsExp.

Sales

Impl 'm'ts

Advg.

Product'n Int. & Dis Loss &Gain

Qen'l Exp I


28/88

2b BOOKKEEPINGTRANSACTIONS

A corporation has been organized under the name of The Acme Manufacturing Com-pany, located at 1220 Michigan Ave., Chicago, 111. Its object is the manufacture andsale of agricultural implements. Its capital stock is $100,000.00, divided into 1000 equalshares of $100.00 each. You are employed as bookkeeper, at a monthly salary of $75.00.The secretary hands you the following subscription list, requesting you to copy it intothe proper book of record:

SUBSCRIPTION LISTWe, the undersigned, hereby subscribe for the amount of Capital Stock in The Acme

Manufacturing Company set opposite our names and seals, and agree to pay the callsupon the said stock as they shall be made by the directors of said company.

Date


29/88

BOOKKEEPINGW. L. SAMPSON

27

Date


30/88

28 BOOKKEEPINGCASH DR.

19


31/88

BOOKKEEPINGCASH CR.

29

19


32/88

30 BOOKKEEPINGfollows, Critchell & Whitney retaining all their old accounts, both receivable andpayable:

Factory & Site $16500.00Tools & Machinery 13500.00Materials on hand 4500.00Implements (finished) 2430.50G. E. Baker's 90-day note dated April 1 1650.00Interest on above, ** days at 6% *.**M. L. Rankin's note at 6% dated Mar. 11 and due

six months after its date 3500.00Interest on above ** days at 6% **.**

Payment was made to Critchell & Whitney as follows: Cash was paid for Factory &Site and Tools & Machinery, and an agreement was made to pay the balance, $****.**on July 1, this time being allowed by Critchell & Whitney in which to collect the notesand dispose of the materials and implements on hand.

THE VOUCHER SYSTEMOne of the by-laws of the company is that the bills are to be paid by the treasurer,who must be able to show a voucher for every disbursement of cash, which voucher shall

be signed by the president of the company and by the person, firm, or corporation receiv-ing the money. (Your teacher will instruct you as to how these signatures may be secured.)Whenever anything is bought or it is necessary for funds to be paid out by the treasurerfor any purpose, you must fill out a voucher, showing all necessary facts in regard to thedisbursement. This voucher must then be signed by the president, who acts upon author-ity conferred by the directors.

In every case the voucher is to be made out and signed by the president at the timethe obligation is incurred, and will remain attached to the stub until time for payment.You will then detach the voucher from its stub and deliver it to the treasurer for pay-ment. He will see that the receipt is signed and the voucher returned to you.

Fill out a voucher for the payment of $30000.00 to Critchell & Whitney, as shownby the form on page 31.

Note. Vouchers and checks are sometimes combined in the "Voucher check." When voucherchecks are used the return of the voucher by the payee is assured, as the voucher check is returned tothe drawer through the bank the same as any other check. Banks do not like to handle voucher checks,because they are cumbersome and impose too great a responsibility upon the bank which honors them.From the standpoint of the business man it is objectionable to combine the voucher and check becausethe voucher is made out at the time the obligation is incurred, while the check should be made out at thetime of payment; and for the further reason that the return of the voucher is delayed when it must passthrough the bank. On the whole, the plan of issuing vouchers and checks separately is the better.

At the time the voucher is filled out, the amount is written in the form of " Payee'sReceipt" (as a convenience to the payee), and the stub is filled out all except the lasttwo lines.

Make out voucher No. 2 for the balance due Critchell & Whitney on July 1. Thisvoucher should contain a list of the items covered by it. The voucher will not be detacheduntil time for payment.


33/88

BOOKKEEPING 31Form of Voucher and Stub

NoJLPayee please sign and return promptly Voucher No.-=^Date Paid /TZnTsif

' /.19-=-

w>^v^^^y^^^^ (^^g!^^y^W^ ^ ^


34/88

32 BOOKKEEPINGVOUCHERS PAYABLE

No.


35/88

BOOKKEEPINGREGISTER

33

Vouch. Pay. Cr


36/88

34 BOOKKEEPINGMake out Voucher No. 3 and have it signed by the president. Let the voucher remain

attached to its stub.Before making the entry in the Vouchers Payable Register, determine whether it

will be more advantageous to pay the bill on May 12 or June 1. If you find it will payto discount the bill, enter May 12 as the due date. The Materials account is to be charged;you will therefore enter the $200.00 in the "Materials Dr." column, as well as in the"Vouchers Payable Cr." column. Check in the L. F. column. Do not fill out the"When and How Paid" column until the bill is paid. Check the voucher stub.The treasurer has paid Critchell & Whitney the $30,000.00 called for by VoucherNo. 1 and now returns to you the receipted voucher.

Note. Your teacher will instruct you as to who will sign the voucher for Critchell & Whitney.When it is signed, fold it so that the briefing will be on the outside, and file it away carefully.May 3. Received from J. C. Houston, Peoria, 111., an order for 24 No. 30 road plows

at $13.50; 1 land roller, at $24.00; and 32 Climax plows, at $9.00. We have shippedthese today via the C. R. I. & P. R. R., terms 2/10 n/30, and paid the freight chargesof $18.25 ourselves.

Note. Wholesale implements are usually sold early in the year (in January or February) and shippedbefore the retailer's sales begin. The bills are usually given a June 1 dating, less 5% for cash on April 1,this dating and terms being given to all bills sold early in the season. The terms quoted Mr. Houstonare not so liberal, as the sale was made later in the season. Bills for fall goods sold will be given the usualliberal terms. /

Debit J. C. Houston in the Sales Book for the amount of the sale.Fill out Voucher No. 4 for $18.25 for the freight. Secure the president's signature.Make the entry in the Vouchers Payable Register, charging Out-Freight. Assuming

that the treasurer has given you a check for $18.25 which you have cashed, and that youhave paid the freight agent, requiring him to sign the voucher, you will now file the voucher.Fill out the "When and How Paid" column in the Vouchers Payable Register.

Note. Your teacher will instruct you as to who will sign this voucher for the payee. All othervouchers will be signed for the payee in the same way. No further reference will be made to thismatter.

Enter the $18.25 on the credit side of the Cash Book in the General column, as shownin the illustration of the Cash Book.

Note. It will be seen that the Vouchers Payable account is credited in the Vouchers Payable Reg-ister for $18.25, and debited through the Cash Book for the same amount (since the total of Cash Cr. isposted to the debit of Vouchers Payable). This debit and credit offset each other. The ultimate resultof the two entries is that Out-Freight is debited through the Vouchers Payable Register, and Cash is cred-ited in the Cash Book.

May 3. Bought from J. T. Ryerson & Son, 1821 21st St., 11679 lbs. bar steel at3 per pound, terms 2/10 n/30.Make out Voucher No. 5. Let it remain attached to its stub. Enter the purchasein the Vouchers Payable Register, charging Materials. Check in the folio column.

May 3. Bought of Ford & Wilson, 229 State St., for cash, 10 gal. Machine Oil, at 850.Make out Voucher No. 6. Make entry in the Voucher Payable Register, charging

Manufacturing Expense. Detach the voucher and secure the president's signature.You have shown the voucher to the treasurer, secured from him a check for the amount,


37/88

BOOKKEEPING 35paid Ford & Wilson, and obtained their signature to the receipt. Enter the date of pay-ment on the voucher stub. File the voucher. Fill out the When & How Paid columnin the Vouchers Payable Register.

Note. Keep the vouchers in numerical order.Make the entry in the Cash Book, using the proper explanations.May 3. Bought of Robert Law, 491 E. 30th St., on account, 10 tons of nut coal,

at $7.60.Make out Voucher No. 7.Record the voucher in the Vouchers Payable Register, charging Manufacturing Ex-

pense. No terms were written on the invoice, but it is understood that the bill is duethe first of next month. You will therefore so record it.

May 3. Shipped today to J. L. Cashel, LaCrosse, Wis., via the C. B. & Q. R. R.,21 Climax plows, at $9.00, terms 2/10 n/30. Prepaid freight for him, $6.50, and chargedhis account for the Mdse and the freight.

Charge J. L. Cashel through the Sales Book for the amount of the Mdse.Fill out Voucher No. 8 for the amount of the freight. Having obtained the presi-

dent's signature to the voucher, secured a check from the treasurer for the $6.50, paidthe freight agent, and secured his signature to the receipt, you will now file the voucherin its order.

Note. No further reference will be made to the procedure of securing the proper signature to thevouchers and paying the bills. It will be understood by you that this is always done, but hereafter youneed only to fill out the vouchers, have them properly signed, and file them in numerical order.

Record Voucher No. 8 in the Vouchers Payable Register, charging J. L. Cashel.Make the entry in the Cash Book.May 4. The weekly payroll is handed in today by the time-keeper, and the men arepaid off. The total amount of the payroll is $125.60.

Fill out Voucher No. 9.In making the entry in the Vouchers Payable Register, charge $15.00 to Materials

Expense; this amount is the total of wages paid to draymen and other workmen whohauled and handled materials. Charge $10.00 to General Expense; this is the salary ofthe janitor. Charge the rest to Manufacturing Labor.

Note. The first two items are said to be "non-productive" labor, as they represent work done whichproduced nothing. The Manufacturing Labor account contains items of productive labor. The firstitem, $15.00, was charged to Materials Expense, because it virtually increased the cost of materials. Thethree items can be entered on two lines of the Vouchers Payable Register.

Make the entry in the Cash Book.May 4. Paid Edna Wilson, the stenographer, her salary for four days, $6.67. Make

out a voucher for this. Enter in the Vouchers Payable Register, charging General Ex-pense. Make the Cash Book entry.May 6. Paid James Quinn, 191 Randolph St., cash for 1640 lbs. steel castings at40, less 2% for cash.

Fill out Voucher No. 11 for the gross amount of the bill, detach, and file it.Make the proper record in the Vouchers Payable Register, charging Materials. Write"Cash less 2%" in the Terms column and in the How Paid column.Make the entry in the Cash Book. Enter the net amount in the General column

and the discount in the Cash Discount Cr. column.


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36 BOOKKEEPING

May 6. Bought of Mears & Bates, 2650 Wells St., on account, 20 M ft. hickorylumber at $35.00. Terms, Note 60 days or 2% off for cash in ten days. We will takeadvantage of the discount.

Fill out Voucher No. 12. Let it remain attached to its stub for the present.Make the entry in the Vouchers Payable Register, charging Materials.May 6. Shipped today via C. B. & Q. R. R. to Warren & Co., Muscatine, Iowa,

14 #E73 walking gang plows, at $15.00; 45 Climax plows, at $9.00; and 5 disc harrowblades, at 500. Terms 2/10 n/30. Freight charges were paid by them.

May 6 Bought of Bishop & Warner, 124 Clark St., for cash, 4 kegs 8d nails at$4.50; 2 kegs clinch nails at $7.00. Terms 2% off for cash.

Fill out Voucher No. 13.Record the purchase in the Vouchers Payable Register, charging Materials.Make the entry in the Cash Book. The net amount is entered in the General column,

and the amount of the discount in the Cash Discount Cr. column.May 7. Received from T. D. Philips, Rock Island, 111., on account, 12 M ft. ash

lumber, clear, at $40.00. His bill is dated May 5. Terms 2/20 n/40. The lumber wassold F.O.B. Rock Island.

Make out Voucher No. 14, leaving it attached to the stub. In making the recordin the" Vouchers Payable Register, charge Materials.

May 7. The lumber from Rock Island was shipped to us via the C. R. I. & P R. R.,freight charges collect. We paid the freight bill, which amounted to $14.50. Fill outa voucher for this, and make an entry in the Vouchers Payable Register, chargingIn-Freight. Make the Cash Book entry.

May 7. Sold on account to F. E. Durrell, Quincy, 111., 50 No. E29 chilled plows,at $3.50; and 12 No. 60 spring lift gang plows, at $42.50; less trade discount of 20% onentire bill. Terms 2/10 n/60. Shipped freight charges collect.

May 7. For convenience in paying small items it has been decided to entrust youwith $20.00 which you may use to pay certain small items for which it is not possibleor convenient to issue a voucher at the time of payment. You are to keep a correct recordof these petty items in the Petty Cash Book, the form of which is here shown.

PETTY CASH BOOK


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BOOKKEEPING 37able Register, charging Petty Cash. Make an entry on the credit side of the Cash Bookin the usual way. Post the item from the Vouchers Payable Register to the Petty Cashbook at once. (This makes the Petty Cash book a part of your double entry system.Its balance must be included in the trial balance.)

May 7. The factory superintendent hands in an itemized report on finishedimplements the estimated cost of which is $3008.50. Make a journal entry debit-ing Implements and crediting Production, and for a full understanding of the entry readthe following paragraphs on The Production Account and work out the problem givenherewith.

The Production Account.

The purpose of the Production account is to show costs of manufacture, and returns,estimated at cost, on the finished articles as they are turned into the storeroom.The Production account is debited with the net results of the Materials account,the Materials Expense account, the Manufacturing Labor account, and other manu-facturing cost accounts, which are closed into it. It is credited with the value of thefinished product estimated at a standard cost figure.

Since the debit side of the account exhibits costs and the credit side exhibits thefinished product valued at cost, it follows that if the costs could be computed with exact-ness and the value of the finished product estimated to the cent, the Production accountwould close without a balance. But exactness is not possible in either of these matters,hence the Production account always exhibits a slight discrepancy between the debitand credit sides at the end of the month. This discrepancy is closed into the Merchan-dise account.

Prices of materials fluctuate, and it is not possible to ascertain the exact cost of the identical materialsused in manufacturing a given article. The adoption of a standard cost figure for that article is the only-satisfactory solution of the problem. Further, this plan furnishes an opportunity for the factory to dem-onstrate its ability to reduce costs, or to manufacture for less than the standard estimated cost price.Some houses prefer to estimate costs at a somewhat higher figure than actual cost so that the saleforce will not know exactly what the cost is. If the finished product is billed to the sales departmentat a safe figure, then the house would not lose even if the sales force should cut down prices to what itconsidered the lowest limit.

The Production account is an intermediate account, coming between the individual cost accountsand the Mdse account. It summarizes the costs. The separate cost accounts could of course all be closeddirectly into the Mdse account, no Production account being used, but this would make the Mdse accountvery cumbersome. The use of the Production account relieves the Mdse account of a great number ofentries. (In the following problem only three cost accounts, viz., Materials, Materials Expense and Man-ufacturing Labor, are closed into the Production account. These are sufficient for purposes of illustra-tion, yet there might be dozens of such accounts.)

Work the following problem on loose sheets, using one sheet of journal paper andone sheet of ledger paper. Allow four ledger accounts to the page.

Problem*. July 1, 19. Kimball & Co. have on hand $50,000.00 in Cash, Pianos(Mdse) valued at $100000.00, Materials valued at $20000.00, and owe workmen for unpaidwages $2500.00. Open accounts with Cash, Pianos, Materials, and Manufacturing Labor,showing the above inventories and the cash balance. Open Kimball & Co.'s account.

July 10. Paid cash for materials, $10000.00.July 12. The foreman of the factory turned over to the superintendent of the Stock-optional.


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38 BOOKKEEPINGroom 125 finished pianos, at an estimated cost of $95.37 each. Open a Production account.Debit Pianos and credit Production.

July 15. Paid workmen for labor, $5000.00 in cash. $500.00 of this is chargeableto Materials Expense. Open a ledger account under the heading "Materials Expense."

July 18. In-Freight bills amounting to $95.60 were paid in cash. Charge to In-Freight.July 20. 91 more pianos have been finished and turned over to the stockroom,

at the same estimated cost as before.July 31. Sales for month, $30000 cash.July 31. Inventory of Materials on hand, $14000.00. Amount due workmen for

labor, $2000.00, $400.00 of which is chargeable to Materials Expense. Close Materials,Materials Expense, and Manufacturing Labor into Production.

July 31. Note that the Production account does not evenly balance. Theoretically, itshould balance exactly, as its debit side is presumed to show exact cost of manufacture,and its credit side is presumed to show the exact output at cost. But for the reasonsabove enumerated there is a slight discrepancy which shows as a gain. Close this to thePianos account.

July 31. Inventory of pianos on hand, $104000.00. Open a Loss & Gain accountand close the Pianos account into it. Close the In-Freight account.Close Loss & Gain.

questions:What was the amount of net assets on July 1?What was the amount of net assets on July 31?Was there an increase of net assets during July?Does this increase agree with the net gain for July?

TransactionsContinuedMay 8. Received an order from J. C. Houston, Peoria, 111., for 8 No. E30 corn

planters, at $38.50, less 25%; and 20 sulky gang plows at $45.00. Billed the goods tohim at 2/10 or note 30 days, shipping via C. & A. Freight charges, paid by us, $23.50.Make out a voucher for the freight; detach and file it. Charge Out-Freight.May 8. Bought of Robert Law, on account, 19 tons Hocking Lump eoal at $5.00.The bill is payable June 1. Charge Manufacturing Expense.May 8. Paid from the Petty Cash fund for 100 20 postage stamps. This is charge-

able to General Expense.No voucher is required for this transaction. Make an entry on the credit side ofthe Petty Cash Book, debiting General Expense. Write the amount and the name ofthe account to be debited in the Sundry Accounts Dr. columns. It is to be posted.

May 9. Bought of D. C. Wade 12 M ft. oak lumber at $80.00. His invoice wasdated May 7. Terms 2/10 n/30.

May 10. Sold to G. W. Hurd, Racine, Wis., 16 No. 237 corn planters, at $38.00less 25%; and 20 shovel plows at $2.62. Terms 2/10 n/30. Trade discount of 20%on entire bill. Freight expense to be borne by the purchaser.

May 10. Filled an order for 30 No. E31 corn planters, at $39.50, less 16%; and9 double harrows, at $10.00, for S. F. Lancey, St. Paul, Minn. Trade discount of 10%on entire bill. Terms 2/10.


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BOOKKEEPING 39May 11. Acting upon authority of the directors, we have today installed a new

Corliss Engine and additional machinery, at a total cost of $12460.00, for which we havepaid the International Machinery Co., Detroit, Mich., in cash. Make out a voucher.Make an entry in the Vouchers Payable Register, charging Tools & Machinery. Makea Cash Book entry.

Note.In case of a special purchase as above (and as in the purchase on May 1 of Critchell &Whitney) when the purchase is large and the items numerous, it is not practicable to list the itemsof the purchase on the voucher. Such large transactions are often evidenced by a special writtencontract (or if real estate, by a deed) and a reference to this contract or deed is all that is necessaryon the voucher.

May 11. The superintendent of the factory finds that the supply of a certain kindof varnish is exhausted, and that he needs some at once. He buys a gallon can of it ata local establishment for 65c1 which is paid from the petty cash fund. (Charge Materials.)

Enter the amount in the Materials column of the Petty Cash Book. Place a checkmark in the L. F. column, as the Materials column will be posted in total.May 11. Cash sales are reported today amounting to $935.60. Enter in the CashBook and in the Sales Book. Place a check mark in the L. F column in each book.May 11. This week's payroll calls for $125.60 for the regular force and $43.50 for

piece-work done by extra help. This is distributed as follows: Materials Expense,$20.00; General Expense, $10.00; Manufacturing Labor, the rest.

May 13. Inspect your Vouchers Payable Register. You will find two bills duetoday (One of these is marked as due May 12, but as the 12th was Sunday the bill maybe paid today). It will be observed that both of these amounts are due to firms in thecity. Had either of them been due to a firm outside of the city, it would have been neces-sary to remit a day or two in advance, so that the money might arrive in time to entitleus to the discount. Detach the two vouchers and pay them, entering the date of pay-ment on the voucher stub. Make proper entries in the Cash Book. Mark the vouchers"paid" in the Vouchers Payable Register. Do not forget to take the discounts.

May 13. Received cash from J. C. Houston for the bill of goods sold him May 3,less 2% cash discount.

May 13. The directors have issued a call for a second installment of 25% of thestock subscription. Prepare Installment List No. 2.

May 13. All stockholders appear today with cash for the amount of their install-ments. Issue Installment Receipts to them. Remember that the vice-President mustsign the receipts issued to J. E. Colby and C. J. Barber. Post from the stubs of the receiptsto the credit of the several stockholders in the Installment Ledger.Make the entry in the Cash Book, crediting Subscription.

May 14. While the corporation was being organized Mr. J. E. Colby advancedcash for the fees paid to the State and the County, and to A. R. Shannon, corporationattorney, for advice. The total amount paid out by Mr. Colby was $250.00. The direct-ors ordered that he be reimbursed. Make out a voucher and pay him in cash. ChargeGeneral Expense.

May 15. The superintendent of the factory summarily discharged Herman Wilke.Wilke's salary for 1\ days, $3.13, was paid out of the petty cash fund and charged toManufacturing Labor. Enter the amount in the special column and check in the L. F.column.


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40 BOOKKEEPINGMay 15. Cash sales were reported amounting to $420.00.May 16. Warren & Co. of Muscatine, Iowa, remitted Chicago exchange in pay-ment of our bill against them for implements purchased May 6, less 2% cash discount.May 16. Inspect your Vouchers Payable Register. If there is a bill due today,

pay it, taking any discount to which we are entitled.May 17. Paid D. C. Wade the net amount due him (See Vouchers Payable Register).May 17. Received cash from F. E. Durrell, Quincy, 111., for bill of May 7, lessdiscount.

May 18. Bought sundry small items of stationery and supplies for the office, $3.65;and stamps, $4.00; which amounts are charged to General Expense through the PettyCash Book.

May 18. J. C. Houston sent us his non-interest-bearing 60-day note dated May8 for the full amount of our bill against him of May 8. We discounted this note at thebank at 7%.

Credit Houston through the Journal.Make the second entry also in the Journal, debiting Cash and Interest & Discount,and crediting Notes Receivable. Post the cash item to the Cash Book immediately,entering folios in both books.

Note. The reason the last transaction was not entered in the Cash Book direct is that the discountitem, not being a cash discount item, could not be entered in the Cash Discount column; nor could it beentered in the General column on the credit side, from which it might have been posted to the debit ofInterest & Discount, because the total of the General column is to be posted to the debit of VouchersPayable.

May 18. J. L. Cashel, of LaCrosse, Wis., remitted $185.22 in payment of his billof May 3 less 2%, accompanied by a letter explaining that he was out of town on May 13,the due date, and expressing the hope that we would overlook the delay. We answeredhis letter courteously refusing to allow him the discount. We returned his check, as theterms of the sale allowed until June 2 in which to pay the bill at the net price.May 18. The payroll for the week showed a total of $165.20, distributed as follows:Materials Expense, $20.00; General Expen

modern corporate ratio by lyon rich

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